The MPS has been interpreted as sending signals about the RBNZ's views on the appropriate level of the dollar; Alex Tarrant takes it as warning of interest rate cuts if the dollar stays high. And the MPS does wonder whether the recent appreciation is justified:
The New Zealand dollar has appreciated markedly since the publication of the December Statement. This appreciation is difficult to reconcile with developments in New Zealand’s economic environment, having occurred at a time when export commodity prices have tracked sideways. Instead, the exchange rate appears to have been driven upward by a combination of an easing in global monetary policy and recovery in global risk appetite.
The March projection assumes the New Zealand dollar TWI depreciates modestly over the next few years. Should this not occur, all else equal, the Bank would see less need to increase the OCR through this time. While helping contain inflation, the high value of the New Zealand dollar is detrimental to the tradable sector, undermines GDP growth, and inhibits rebalancing in the New Zealand economy.But this doesn't translate into the RBNZ now targeting the exchange rate, even if Bernard Hickey wishes it were so. The high dollar automatically keeps the CPI down by pushing down the price of tradeable goods in the CPI basket. So if the dollar stays high, there's less need for RBNZ to do anything on interest rates. And if policy easing elsewhere is pushing up the New Zealand dollar, that might give reason for easing on our own part to avoid falling below the lower band of the PTA, if there's risk of falling below the lower bound. iPredict says 10% chance of inflation below 1% in either of the next two quarters, so it's not looking particularly likely. RBNZ, in my reading, is just reminding folks that its inflation target is bounded both from above and from below and using that to do a bit of jawboning on the dollar.
I'm less than convinced that a high dollar is such a bad thing. Even if dairy prices have been flat over the recent few quarters' dollar appreciation, it's hard to say whether that means that the dollar's current strength is unjustified or whether it means the weakness during the worldwide recession was a temporary thing. If the appreciation is due to "the increase in risk appetite, higher global commodity prices and further policy easing by major central banks", a decent chunk is just a return to the status quo ex ante, and perhaps only a temporary one with Greece looking more likely to have a messy default sooner or later and with reasonable concerns about malinvestments in China. But if the rest of the world is getting better, we're back to folks being willing to take on currency risk in exchange for relatively higher returns available in NZ.
Import-competing sectors face stronger competition when the dollar is high. But it's debatable whether some of those import-competing sectors should even here exist. Book retailing probably shouldn't survive here outside of a few niches in the long term when BookDepository can get books here from the UK, delivered, for a bit more than half of the current retail price. If the worry is that milk exports drive up the price of the dollar and hurt other manufacturing, that's not unlike the current situation in Canada where oil and commodity exports have strengthened the Canadian dollar. Stephen Gordon there is trenchant:
Real median wages here also increased substantially from 1998 to 2009 or so**, with nominal stagnation and some real decline during the recent period.
Commodity price driven dollar appreciation isn't as much a disease as a recommendation to shift resources to their more highly valued uses. We're shifting towards dairy manufacturing and away from other forms of manufacturing. I wouldn't call it a disease in need of treatment.
* Please take the strong caveat that I am not a macro economist. And, while I think I was right in criticizing the RBNZ back in 2005 for being too slack, they were very right and I was very wrong in early 2008 when I worried about their very rapid cuts in interest rates.
**This is a nominal series; CPI here for adjusting. Real median wages up about 18% over the decade.